Procurement risks - 3 of the biggest facing businesses right now
From preventing another horsemeat scandal to ensuring supply chain workers are legally employed, it’s fair to say procurement is on the front line for safeguarding an organisation’s reputation and business viability, as well as supply continuity.
Events show that when procurement goes wrong, however far along the chain it happens, the consequences for business are huge. Significant reputational damage or ultimate business failure become possibilities beyond the pain of supply interruption.
With legislation like the Modern Slavery Act requiring organisations to explain their actions in this area and a growing trend for corporations to fully audit their supply sources worldwide, the need to face risks head on is becoming ever more essential.
In our look at the issues facing purchasing teams this and next year, there appear to be three key risk areas.
Not digging deep enough with suppliers
The risks brought to a business through its supply chain remain a chief worry for procurement professionals, with 45% of those questioned in the 2015 Consero Global Procurement Strategic Sourcing Data Survey naming supplier risk as a top concern.
When it comes to measuring this risk, in all its forms, this is no mean feat. Nick Ford in Procurement Leaders calls supplier risk ‘the tip of an iceberg’. While all sensible businesses review their suppliers’ financial performance, this is an aspect publicly available and more easy to see – the visible 10% of the iceberg.
Once this financial risk has been assessed, the less easy to uncover risks come within supply chain and corporate social responsibility. Nick Ford calls these ‘multiple tiers, across multiple dimensions.’
From political change to climate to management team changes, the onus is on procurement professionals to think carefully about the range of scenarios they face in their markets and to dig deep to find the right facts and the proof needed, to prepare for as many eventualities as possible.
Not fully addressing corporate social responsibility
From horsemeat finding its way into beef products to the risk of conflict minerals being used to make Smartphones, it’s been documented that controversially sourced supplies are able to find their way into mainstream products.
However, demands for companies to be transparent, responsible and accountable have increased exponentially in recent years. Organisations have to explain, more clearly than ever, where and how their raw materials are sourced and prove the labour in their supply chain is legal.
Two recent examples in 2016 signpost the future for all organisations. In its most recent company filing, iPhone maker Apple has confirmed it is now auditing all its suppliers, including those where there is the risk of conflict minerals, linked to the funding of violent militia groups in countries such as the Democratic Republic of Congo, reaching the supply chain. From auditing a smaller percentage in recent years, the move to audit all 242 smelters shows that Apple is now creating, in its words, ‘one of the strictest supplier codes of conduct in the industry’.
Not having enough evidence to show that the labour used across your supply chain is legal can have severe consequences. Producer PureCircle, which supplies to Coca-Cola and others, has been hit by a customs ban in the US after claims that its artificial sweetener is produced using convict labour. Despite the business saying these are false allegations, the US Customs and Border Protection seized all shipments of PureCircle stevia extracts and derivatives upon entering the country. Importers of detained shipments are given a three-month window to demonstrate the merchandise is not produced with forced labour.
UK-based organisations are not escaping these expectations. Over 12,000 UK companies with a turnover of £36m or more are now required to comply with the Modern Slavery Act and show the steps they are taking to ensure there is no slavery and trafficking in their supply chains.
To show the actions they are taking in this area, companies must make a statement, approved by the board and signed by a company director, publicly available on their website homepage. Analysis in early 2016 showed that most modern slavery statements were not compliant with the act at that point. Of 75 statements analysed, only 22 were both signed by a director and available from a link on the company’s website homepage. Another 33 were not signed by a director and the same number did not feature a link to the statement from their website homepage.
Businesses wondering how to address the Modern Slavery Act are advised by Simon McCarthy in Supply Management to get proper legal advice in the first place, rather than immediately turning to third party auditing or platform solutions. He suggests prioritising the supply chain, by addressing those products and services likely to have low skilled or semi-skilled workers. As people can be trafficked anywhere in the world, he says no-one should assume this is just a developing world problem. Procurement professionals are advised to make a plan that includes a policy statement, staff training, changes to processes and contract documents and measurement of performance and engagement.
Not factoring in climate change
While many procurement professionals may not factor climate change
into their planning, there are many arguing that they should. A Pwc report shows how climate change can amplify or alter existing risks, from the availability of raw materials such as water and energy to transport disruption from extreme weather events. The resulting shocks on the global supply chain can be severe and persistent.
Climate change creates more than a few consequences for supply chains. Pwc gives the example of a severe heat wave in Russia in 2010, where the resulting economic losses were estimated to be US$15bn as drought and wildfires destroyed crops, particularly wheat. This led to export restrictions on wheat in Russia, which contributed to global price increases.
Those procurement teams who fail to reach out to their suppliers to understand what they’re doing to understand the climate change risks may be placing their organisation and supply chain at greater risk than they realise.